If you have ever been in the market for a home, considered refinancing or visited a real estate website out of idle curiosity, you have probably toyed with an online mortgage calculator. While these nifty tools give you a baseline for your home purchase or refinance, they also leave out several crucial items.
1. Specifics tied to the type of the loan.
First, it is important to understand that FHA, VA and conventional loans are all vastly different products, and each type of loan comes with different costs and stipulations. While some mortgage calculators account for some of these specific costs, scenarios vary so greatly and are so intensely personal that it is near to impossible to know what your loan scenario looks like unless you speak with a state licensed mortgage broker.
2. Not considering closing costs.
Closing costs are a compilation of your upfront property taxes, loan origination fees, title fees and a few loan specific (and transaction specific) costs. For most transactions, closing costs equate from three to six percent of the home’s sale price. These fees are in addition to a buyer’s down payment.
3. Leaving out PMI.
Private Mortgage Insurance (PMI) or Mortgage Insurance Protection (MIP) are both upfront (paid at closing) and monthly fees paid to the lender when you (as a buyer) come to the closing table with less than a 20 percent down payment. Mortgage insurance fees are added to your closing costs and monthly payments. These fees protect the lender’s loss, in the event you become insolvent and the lender is forced to foreclose. Mortgages requiring MIP or PMI can potentially change your payment by more than $50 per month, making it a noteworthy fee.
4. Not estimating basic (or extra) property insurance or taxes.
It is impossible to estimate property insurance costs without having property. Homeowner’s insurance policies remain a massive variable in the home buying process for any homeowner. In addition to basic coverage, some properties require additional insurance for floods or earthquakes, depending on location.
The same goes for property taxes. Without a property to estimate taxes for, property taxes (an annual expense of several thousand dollars) are not factored in to the mortgage calculator equation.
5. Leaving out maintenance and repair costs.
Home maintenance and repair costs are approximately one to three percent of the home’s value. Mortgage calculators provide a bird’s eye view of a mortgage, but do not account for a cost of ownership –a very large factor when considering affordability. When purchasing a home, you should deduct three percent off your total loan approval amount, to make sure that you can set aside three percent annually for upgrades and maintenance.
Still, you should not get the wrong idea about these calculators. By no means are mortgage calculators obsolete, but they are no substitute for professional advice. Use a mortgage calculator to navigate the beginning stages of the home purchase process. Use these figures to help you draft an initial budget to help with planning for a purchase, but leave the down and dirty calculations to a mortgage professional.